WAEC SSCE - Economics - 2008 (Essay)
Question 1 Rapport
Explain the following systems of agriculture as practiced in your country:
(a) subsistence farming; [4 marks]
(b) co-operative agriculture; [4 marks]
(c) plantation agriculture; [4 marks]
(d) mechanized agriculture; [4 marks]
(e) peasant farming. [4 marks]
These are the main systems under which agriculture is organised in Nigeria.
(a) Subsistence farming: production of crops and livestock mainly to feed the farmer and the household, with little or no surplus for sale. It uses simple tools (hoe, cutlass), small plots and family labour, so output and productivity are low.
(b) Co-operative agriculture: a system in which farmers voluntarily pool their resources (land, capital, labour, and inputs) and work together as a registered co-operative society. They share tools, obtain credit and improved seeds jointly, market produce together and share the proceeds, which raises their bargaining power and reduces costs.
(c) Plantation agriculture: large-scale cultivation of a single cash crop (for example oil palm, rubber, cocoa or sugar cane) on a very large estate, using heavy capital, hired labour and modern management, mainly for export or industrial processing.
(d) Mechanized agriculture: farming that relies on machines and modern equipment such as tractors, harvesters, planters and irrigation pumps rather than human or animal power. It permits large hectarage, higher output per worker and timely operations, but requires much capital.
(e) Peasant farming: small-scale farming carried out by individual local farmers on scattered small holdings, using traditional methods, family labour and simple implements, producing mainly for the family with a small surplus sold in local markets.
Examination reminder: keep subsistence, peasant and mechanized distinct: subsistence stresses the purpose (self-consumption), peasant stresses the scale and holder (small individual farmer), and mechanized stresses the method (use of machines).
Détails de la réponse
These are the main systems under which agriculture is organised in Nigeria.
(a) Subsistence farming: production of crops and livestock mainly to feed the farmer and the household, with little or no surplus for sale. It uses simple tools (hoe, cutlass), small plots and family labour, so output and productivity are low.
(b) Co-operative agriculture: a system in which farmers voluntarily pool their resources (land, capital, labour, and inputs) and work together as a registered co-operative society. They share tools, obtain credit and improved seeds jointly, market produce together and share the proceeds, which raises their bargaining power and reduces costs.
(c) Plantation agriculture: large-scale cultivation of a single cash crop (for example oil palm, rubber, cocoa or sugar cane) on a very large estate, using heavy capital, hired labour and modern management, mainly for export or industrial processing.
(d) Mechanized agriculture: farming that relies on machines and modern equipment such as tractors, harvesters, planters and irrigation pumps rather than human or animal power. It permits large hectarage, higher output per worker and timely operations, but requires much capital.
(e) Peasant farming: small-scale farming carried out by individual local farmers on scattered small holdings, using traditional methods, family labour and simple implements, producing mainly for the family with a small surplus sold in local markets.
Examination reminder: keep subsistence, peasant and mechanized distinct: subsistence stresses the purpose (self-consumption), peasant stresses the scale and holder (small individual farmer), and mechanized stresses the method (use of machines).
Question 2 Rapport
(a) What is supply? [5 marks]
(b) Describe any five determinants of supply. [15marks]
(a) Supply is the quantity of a good or service that producers are willing and able to offer for sale at a given price over a given period of time. It is not the total stock in existence but the amount actually put on the market at each price; according to the law of supply, more is supplied at a higher price and less at a lower price, other things being equal.
(b) Five determinants of supply:
- Price of the commodity: a higher price makes production more profitable, so producers supply more; a lower price reduces the quantity supplied.
- Cost of production: a rise in the cost of inputs (wages, raw materials, fuel) reduces profit and lowers supply, while a fall in costs raises supply.
- State of technology: improved technology raises productivity and lowers unit cost, enabling producers to supply more.
- Prices of other (related) goods: if the price of an alternative product a firm could make rises, resources shift to it, reducing the supply of the original good.
- Government policy: taxes on production reduce supply, while subsidies to producers increase supply.
(Other acceptable determinants: natural factors such as weather for agricultural goods, the number of producers in the market, and producers' expectations of future prices.)
Détails de la réponse
(a) Supply is the quantity of a good or service that producers are willing and able to offer for sale at a given price over a given period of time. It is not the total stock in existence but the amount actually put on the market at each price; according to the law of supply, more is supplied at a higher price and less at a lower price, other things being equal.
(b) Five determinants of supply:
- Price of the commodity: a higher price makes production more profitable, so producers supply more; a lower price reduces the quantity supplied.
- Cost of production: a rise in the cost of inputs (wages, raw materials, fuel) reduces profit and lowers supply, while a fall in costs raises supply.
- State of technology: improved technology raises productivity and lowers unit cost, enabling producers to supply more.
- Prices of other (related) goods: if the price of an alternative product a firm could make rises, resources shift to it, reducing the supply of the original good.
- Government policy: taxes on production reduce supply, while subsidies to producers increase supply.
(Other acceptable determinants: natural factors such as weather for agricultural goods, the number of producers in the market, and producers' expectations of future prices.)
Question 3 Rapport
(a) Distinguish between a cheque and a bank note [8 marks]
(b) What are the main problems of trade by barter? [12 marks]
(a) Cheque compared with a bank note.
| Feature | Cheque | Bank note |
|---|---|---|
| Nature | A written order instructing a bank to pay a stated sum from the drawer's account | Printed paper currency issued by the Central Bank |
| Legal tender | Not legal tender; a payee may lawfully refuse it | Legal tender that must be accepted in settlement of debt |
| Issuer | Drawn by an account holder on a commercial bank | Issued solely by the Central Bank |
| General acceptability | Limited; may bounce if the account lacks funds | Generally and readily acceptable |
| Denomination | Written for any exact amount | Comes in fixed denominations |
(b) Main problems of trade by barter. Barter is the direct exchange of goods for goods without money. Its problems are:
- Double coincidence of wants: each trader must find someone who has what he wants and also wants what he has, which is difficult and time-wasting.
- Lack of a common measure of value: there is no single unit for pricing, so it is hard to state how much of one good exchanges for another.
- Indivisibility of some goods: items such as a cow or a house cannot be split to buy small-value goods without destroying their value.
- Difficulty in storing value (wealth): many goods (foodstuffs, livestock) are perishable, so wealth cannot easily be saved for the future.
- Problem of deferred (future) payments: contracts, loans and credit are hard to arrange because there is no stable standard for repayment.
- Lack of portability: moving bulky goods over distances to exchange them is costly and inconvenient.
Examination reminder: present the barter problems as the mirror-image of the functions of money, since money was invented to solve exactly these difficulties.
Détails de la réponse
(a) Cheque compared with a bank note.
| Feature | Cheque | Bank note |
|---|---|---|
| Nature | A written order instructing a bank to pay a stated sum from the drawer's account | Printed paper currency issued by the Central Bank |
| Legal tender | Not legal tender; a payee may lawfully refuse it | Legal tender that must be accepted in settlement of debt |
| Issuer | Drawn by an account holder on a commercial bank | Issued solely by the Central Bank |
| General acceptability | Limited; may bounce if the account lacks funds | Generally and readily acceptable |
| Denomination | Written for any exact amount | Comes in fixed denominations |
(b) Main problems of trade by barter. Barter is the direct exchange of goods for goods without money. Its problems are:
- Double coincidence of wants: each trader must find someone who has what he wants and also wants what he has, which is difficult and time-wasting.
- Lack of a common measure of value: there is no single unit for pricing, so it is hard to state how much of one good exchanges for another.
- Indivisibility of some goods: items such as a cow or a house cannot be split to buy small-value goods without destroying their value.
- Difficulty in storing value (wealth): many goods (foodstuffs, livestock) are perishable, so wealth cannot easily be saved for the future.
- Problem of deferred (future) payments: contracts, loans and credit are hard to arrange because there is no stable standard for repayment.
- Lack of portability: moving bulky goods over distances to exchange them is costly and inconvenient.
Examination reminder: present the barter problems as the mirror-image of the functions of money, since money was invented to solve exactly these difficulties.
Question 4 Rapport
(a) Explain the term internal economies of scale. [4 marks]
(b) Outline any four economies of scale a firm enjoys as it grows in size. [16marks]
(a) Internal economies of scale are the cost advantages that a single firm enjoys as it expands its own scale of production, causing its average (unit) cost of production to fall. They arise from within the firm itself, not from the growth of the whole industry.
(b) Four economies of scale enjoyed as the firm grows:
- Technical economies: a large firm can install big, specialised and more efficient machines and use methods (such as mass production) that spread fixed costs over more units, lowering cost per unit.
- Managerial economies: a large firm can employ specialist managers for separate departments (production, finance, marketing), so it is more efficiently run and management costs per unit fall.
- Marketing (commercial) economies: by buying raw materials in bulk it obtains discounts, and it spreads advertising and selling costs over a large output, reducing cost per unit.
- Financial economies: a large, well-known firm can raise capital more easily and at lower interest rates than a small firm, because lenders regard it as more secure.
(Other acceptable types: risk-bearing economies through diversifying products and markets, and research economies from funding its own research and development.)
Détails de la réponse
(a) Internal economies of scale are the cost advantages that a single firm enjoys as it expands its own scale of production, causing its average (unit) cost of production to fall. They arise from within the firm itself, not from the growth of the whole industry.
(b) Four economies of scale enjoyed as the firm grows:
- Technical economies: a large firm can install big, specialised and more efficient machines and use methods (such as mass production) that spread fixed costs over more units, lowering cost per unit.
- Managerial economies: a large firm can employ specialist managers for separate departments (production, finance, marketing), so it is more efficiently run and management costs per unit fall.
- Marketing (commercial) economies: by buying raw materials in bulk it obtains discounts, and it spreads advertising and selling costs over a large output, reducing cost per unit.
- Financial economies: a large, well-known firm can raise capital more easily and at lower interest rates than a small firm, because lenders regard it as more secure.
(Other acceptable types: risk-bearing economies through diversifying products and markets, and research economies from funding its own research and development.)
Question 5 Rapport
Outline any five effects of high dependency ratio [20 marks]
The dependency ratio is the ratio of the dependent population (those below the working age, usually under 15, and those above it, usually over 64) to the working population (aged 15 to 64). A high dependency ratio means each worker supports many non-workers. Its effects include:
- Low savings and investment: most income is spent on maintaining dependants, leaving little to save, so funds available for investment and growth are reduced.
- Low standard of living: a worker's income is shared among many dependants, so income per head is small and living standards fall.
- Heavy burden on the working population: workers bear high responsibility for feeding, clothing, housing, educating and caring for dependants, which can lower their morale and welfare.
- Pressure on social services: demand for schools, hospitals, housing and other amenities rises faster than they can be provided, leading to congestion and poor services.
- Increased government expenditure on welfare: government must spend more on education, health and social security for dependants, straining public finances.
- Reduced capital formation and slow economic growth: because savings and investment are low, the economy grows slowly. (Also acceptable: encourages child labour and can worsen unemployment.)
Any five, well explained, complete the answer.
Détails de la réponse
The dependency ratio is the ratio of the dependent population (those below the working age, usually under 15, and those above it, usually over 64) to the working population (aged 15 to 64). A high dependency ratio means each worker supports many non-workers. Its effects include:
- Low savings and investment: most income is spent on maintaining dependants, leaving little to save, so funds available for investment and growth are reduced.
- Low standard of living: a worker's income is shared among many dependants, so income per head is small and living standards fall.
- Heavy burden on the working population: workers bear high responsibility for feeding, clothing, housing, educating and caring for dependants, which can lower their morale and welfare.
- Pressure on social services: demand for schools, hospitals, housing and other amenities rises faster than they can be provided, leading to congestion and poor services.
- Increased government expenditure on welfare: government must spend more on education, health and social security for dependants, straining public finances.
- Reduced capital formation and slow economic growth: because savings and investment are low, the economy grows slowly. (Also acceptable: encourages child labour and can worsen unemployment.)
Any five, well explained, complete the answer.
Question 6 Rapport
(a) Define the term limited liability [4 marks]
(b) Explain any four problems of statutory public corporations in your country [16 marks]
(a) Limited liability means that the liability (financial responsibility) of an owner for the debts of a business is limited to the amount he has invested or agreed to contribute. If the business fails, the owner can lose only his investment; his personal property cannot be seized to settle the business's debts.
(b) Four problems of statutory public corporations:
- Inefficiency and mismanagement: because they are government owned and not driven by profit, many corporations are poorly managed, wasteful and produce low-quality services.
- Political interference: appointments and decisions are often influenced by politicians rather than by ability and sound business judgement, which lowers efficiency.
- Financial losses and dependence on subsidies: many corporations run at a loss and depend on government subsidies, becoming a drain on public funds.
- Corruption: weak accountability encourages fraud, embezzlement and misuse of the corporation's resources by officials.
(Other acceptable problems: bureaucratic red tape and slow decision-making, and the tendency toward monopoly, which removes the pressure to be efficient.)
Détails de la réponse
(a) Limited liability means that the liability (financial responsibility) of an owner for the debts of a business is limited to the amount he has invested or agreed to contribute. If the business fails, the owner can lose only his investment; his personal property cannot be seized to settle the business's debts.
(b) Four problems of statutory public corporations:
- Inefficiency and mismanagement: because they are government owned and not driven by profit, many corporations are poorly managed, wasteful and produce low-quality services.
- Political interference: appointments and decisions are often influenced by politicians rather than by ability and sound business judgement, which lowers efficiency.
- Financial losses and dependence on subsidies: many corporations run at a loss and depend on government subsidies, becoming a drain on public funds.
- Corruption: weak accountability encourages fraud, embezzlement and misuse of the corporation's resources by officials.
(Other acceptable problems: bureaucratic red tape and slow decision-making, and the tendency toward monopoly, which removes the pressure to be efficient.)
Question 7 Rapport
Give four reasons why the governments of West African countries have found the policy of privatization attractive. [20 marks]
Privatization is the transfer of ownership and control of government-owned enterprises to private individuals or companies. Governments of West African countries have found it attractive for the following reasons:
- To reduce the financial burden on government: many public enterprises run at a loss and depend on subsidies; selling them stops this drain and even raises revenue from the sale.
- To improve efficiency and productivity: private owners are profit-motivated and are expected to manage the enterprises more efficiently, reduce waste and raise the quality of goods and services.
- To raise revenue for the government: the proceeds from selling the enterprises provide funds that can be used to finance other development projects or reduce debt.
- To encourage private investment and widen ownership: privatization attracts local and foreign investors and, through the sale of shares, spreads ownership of wealth among more citizens.
(Other acceptable reasons: to reduce political interference and corruption in the management of enterprises, and to deepen the capital market by increasing the number of quoted companies.)
Détails de la réponse
Privatization is the transfer of ownership and control of government-owned enterprises to private individuals or companies. Governments of West African countries have found it attractive for the following reasons:
- To reduce the financial burden on government: many public enterprises run at a loss and depend on subsidies; selling them stops this drain and even raises revenue from the sale.
- To improve efficiency and productivity: private owners are profit-motivated and are expected to manage the enterprises more efficiently, reduce waste and raise the quality of goods and services.
- To raise revenue for the government: the proceeds from selling the enterprises provide funds that can be used to finance other development projects or reduce debt.
- To encourage private investment and widen ownership: privatization attracts local and foreign investors and, through the sale of shares, spreads ownership of wealth among more citizens.
(Other acceptable reasons: to reduce political interference and corruption in the management of enterprises, and to deepen the capital market by increasing the number of quoted companies.)
Question 8 Rapport
(a) What is public recurrent expenditure? [5 marks]
(b) Give five reasons for the rapid increase in government expenditure in your country. [15 marks]
(a) Public recurrent expenditure. This is government spending on the day-to-day running of the state that recurs regularly and does not create a lasting physical asset. It covers items such as salaries and wages of civil servants, interest on public debt, maintenance of existing facilities, subsidies and general administration. It is contrasted with capital expenditure, which builds durable assets like roads, schools and hospitals.
(b) Reasons for the rapid increase in government expenditure in Nigeria.
- Rapid population growth: a larger and fast-growing population demands more schools, hospitals, water and other public services, raising spending.
- Provision of infrastructure: heavy outlays on roads, electricity, railways and ports needed for development enlarge the budget.
- Rising cost of administration: creation of new states, ministries and local governments, plus higher salaries and pensions, increases recurrent spending.
- Inflation: a general rise in prices means the government pays more for the same goods, services and projects.
- Debt servicing: interest and principal repayments on growing internal and external debts consume an increasing share of the budget.
- Defence and internal security: spending on the armed forces and police to maintain law and order has risen sharply.
- Social and welfare services: expansion of education, health, subsidies and poverty-relief programmes adds to expenditure.
Examination reminder: the question asks for five reasons, so state five clearly and explain each with a short sentence rather than merely listing.
Détails de la réponse
(a) Public recurrent expenditure. This is government spending on the day-to-day running of the state that recurs regularly and does not create a lasting physical asset. It covers items such as salaries and wages of civil servants, interest on public debt, maintenance of existing facilities, subsidies and general administration. It is contrasted with capital expenditure, which builds durable assets like roads, schools and hospitals.
(b) Reasons for the rapid increase in government expenditure in Nigeria.
- Rapid population growth: a larger and fast-growing population demands more schools, hospitals, water and other public services, raising spending.
- Provision of infrastructure: heavy outlays on roads, electricity, railways and ports needed for development enlarge the budget.
- Rising cost of administration: creation of new states, ministries and local governments, plus higher salaries and pensions, increases recurrent spending.
- Inflation: a general rise in prices means the government pays more for the same goods, services and projects.
- Debt servicing: interest and principal repayments on growing internal and external debts consume an increasing share of the budget.
- Defence and internal security: spending on the armed forces and police to maintain law and order has risen sharply.
- Social and welfare services: expansion of education, health, subsidies and poverty-relief programmes adds to expenditure.
Examination reminder: the question asks for five reasons, so state five clearly and explain each with a short sentence rather than merely listing.
Question 9 Rapport
The table below shows the budgetary allocation of a country to selected sectors of the economy in a particular year. Study the table carefully and answer the questions that follow.
| Sectors | Amount ( $ Million) |
| Education | 6,250 |
| Mining | 2,150 |
| Agriculture | 4,300 |
| Communication | 2,400 |
| Health | 2,900 |
(a) Present the above information contained in the table in the form of a pie chart. (Show your workings clearly). [12 marks]
(b) Distinguish between a budget surplus and a budget deficit. [8 marks]
(a) Pie chart of the budgetary allocation
First, calculate the total allocation:
\[\$6,250+\$2,150+\$4,300+\$2,400+\$2,900=\$18,000\text{ million}\]
The angle for each sector is calculated as:
\[\text{Sector angle}=\frac{\text{Sector allocation}}{\text{Total allocation}}\times360^\circ\]
| Sector | Allocation ($ million) | Working | Angle |
|---|---|---|---|
| Education | 6,250 | \(\frac{6,250}{18,000}\times360^\circ\) | 125° |
| Mining | 2,150 | \(\frac{2,150}{18,000}\times360^\circ\) | 43° |
| Agriculture | 4,300 | \(\frac{4,300}{18,000}\times360^\circ\) | 86° |
| Communication | 2,400 | \(\frac{2,400}{18,000}\times360^\circ\) | 48° |
| Health | 2,900 | \(\frac{2,900}{18,000}\times360^\circ\) | 58° |
| Total | 18,000 | 360° |
Using the calculated angles, the pie chart is:
(b) A budget surplus occurs when the government’s planned revenue is greater than its planned expenditure. A budget deficit occurs when the government’s planned expenditure is greater than its planned revenue.
Détails de la réponse
(a) Pie chart of the budgetary allocation
First, calculate the total allocation:
\[\$6,250+\$2,150+\$4,300+\$2,400+\$2,900=\$18,000\text{ million}\]
The angle for each sector is calculated as:
\[\text{Sector angle}=\frac{\text{Sector allocation}}{\text{Total allocation}}\times360^\circ\]
| Sector | Allocation ($ million) | Working | Angle |
|---|---|---|---|
| Education | 6,250 | \(\frac{6,250}{18,000}\times360^\circ\) | 125° |
| Mining | 2,150 | \(\frac{2,150}{18,000}\times360^\circ\) | 43° |
| Agriculture | 4,300 | \(\frac{4,300}{18,000}\times360^\circ\) | 86° |
| Communication | 2,400 | \(\frac{2,400}{18,000}\times360^\circ\) | 48° |
| Health | 2,900 | \(\frac{2,900}{18,000}\times360^\circ\) | 58° |
| Total | 18,000 | 360° |
Using the calculated angles, the pie chart is:
(b) A budget surplus occurs when the government’s planned revenue is greater than its planned expenditure. A budget deficit occurs when the government’s planned expenditure is greater than its planned revenue.
Question 10 Rapport
The demand function for a commodity is given as \(Qd = 21 - 3p\).
(a) Use the demand function to complete the table below. [6 marks]
| Price $ | 0 | 1 | 3 | 4 | 5 | 6 |
| Quantity demanded (Kg) |
(b) Draw the demand curve for the completed schedule in 1(a) (Use of graph sheet is essential) [8 marks]
(c) Outline any three factors affecting demand [6 marks]
(a) Demand schedule
Given \(Q_d = 21 - 3P\):
| Price, \(P\) ($) | 0 | 1 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Quantity demanded, \(Q_d\) (kg) | 21 | 18 | 12 | 9 | 6 | 3 |
For example:
- When \(P=0\), \(Q_d=21-3(0)=21\) kg.
- When \(P=3\), \(Q_d=21-3(3)=12\) kg.
- When \(P=6\), \(Q_d=21-3(6)=3\) kg.
(b) Demand curve
Plot quantity demanded on the horizontal axis and price on the vertical axis. Plot the points \((21,0)\), \((18,1)\), \((12,3)\), \((9,4)\), \((6,5)\), and \((3,6)\), and join them with a straight line labelled \(DD\).
The downward-sloping curve shows the inverse relationship between price and quantity demanded.
(c) Three factors affecting demand
- Income of consumers: An increase in income raises demand for normal goods, while it may reduce demand for inferior goods.
- Prices of related goods: A rise in the price of a substitute increases demand for the commodity, whereas a rise in the price of a complement reduces its demand.
- Tastes, fashion and advertisement: Favourable changes in consumers' tastes or effective advertisement increase demand, while unfavourable changes reduce it.
Détails de la réponse
(a) Demand schedule
Given \(Q_d = 21 - 3P\):
| Price, \(P\) ($) | 0 | 1 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Quantity demanded, \(Q_d\) (kg) | 21 | 18 | 12 | 9 | 6 | 3 |
For example:
- When \(P=0\), \(Q_d=21-3(0)=21\) kg.
- When \(P=3\), \(Q_d=21-3(3)=12\) kg.
- When \(P=6\), \(Q_d=21-3(6)=3\) kg.
(b) Demand curve
Plot quantity demanded on the horizontal axis and price on the vertical axis. Plot the points \((21,0)\), \((18,1)\), \((12,3)\), \((9,4)\), \((6,5)\), and \((3,6)\), and join them with a straight line labelled \(DD\).
The downward-sloping curve shows the inverse relationship between price and quantity demanded.
(c) Three factors affecting demand
- Income of consumers: An increase in income raises demand for normal goods, while it may reduce demand for inferior goods.
- Prices of related goods: A rise in the price of a substitute increases demand for the commodity, whereas a rise in the price of a complement reduces its demand.
- Tastes, fashion and advertisement: Favourable changes in consumers' tastes or effective advertisement increase demand, while unfavourable changes reduce it.
Question 11 Rapport
(a) What is a market? [4 marks]
(b) Explain the main features of a perfectly competitive market. [16 marks]
(a) A market is any arrangement, place or situation that brings buyers and sellers of a good or service into contact so that they can carry out transactions and determine a price. It need not be a physical location; contact by telephone or the internet also forms a market.
(b) Main features of a perfectly competitive market:
- Very many buyers and sellers: each buyer and seller is so small relative to the whole market that no one of them can influence the price; every firm is a price taker.
- Homogeneous product: all firms sell an identical (uniform) product, so buyers have no reason to prefer one seller to another.
- Freedom of entry and exit: there are no barriers, so firms can enter the industry when profits are high and leave when they make losses.
- Perfect knowledge: buyers and sellers have full information about prices and market conditions, so the same price rules throughout the market.
- Perfect mobility of factors of production: resources can move freely from one use or place to another.
- No transport costs and no government interference, so a single uniform price prevails.
Because of these conditions, a single ruling price is established and each firm faces a perfectly elastic (horizontal) demand curve.
Détails de la réponse
(a) A market is any arrangement, place or situation that brings buyers and sellers of a good or service into contact so that they can carry out transactions and determine a price. It need not be a physical location; contact by telephone or the internet also forms a market.
(b) Main features of a perfectly competitive market:
- Very many buyers and sellers: each buyer and seller is so small relative to the whole market that no one of them can influence the price; every firm is a price taker.
- Homogeneous product: all firms sell an identical (uniform) product, so buyers have no reason to prefer one seller to another.
- Freedom of entry and exit: there are no barriers, so firms can enter the industry when profits are high and leave when they make losses.
- Perfect knowledge: buyers and sellers have full information about prices and market conditions, so the same price rules throughout the market.
- Perfect mobility of factors of production: resources can move freely from one use or place to another.
- No transport costs and no government interference, so a single uniform price prevails.
Because of these conditions, a single ruling price is established and each firm faces a perfectly elastic (horizontal) demand curve.
Question 12 Rapport
(a) Define the profit of a firm [4 marks]
(b) With appropriate formula, explain the following revenue and cost concepts:
(i) total revenue (TR); [4 marks]
(ii) average revenue (AR): [4 marks]
(iii) marginal revenue (MR); [4 marks]
(iv) average fixed cost (AFC). [4 marks]
(a) Profit of a firm. Profit is the financial surplus a firm earns when its total revenue from selling output exceeds its total cost of production over a given period. In symbols, \( \text{Profit} = TR - TC \). Economists distinguish accounting profit (revenue minus explicit money costs) from economic (normal and supernormal) profit, where cost also includes the opportunity cost of the entrepreneur's own resources. Profit rewards the entrepreneur for risk-bearing and organisation.
(b) Revenue and cost concepts.
(i) Total Revenue (TR): the total money a firm receives from selling a given quantity of output. \( TR = P \times Q \), where \( P \) is price per unit and \( Q \) is quantity sold. If 100 units sell at \( \text{N}5 \) each, \( TR = 100 \times 5 = \text{N}500 \).
(ii) Average Revenue (AR): revenue earned per unit of output sold. \( AR = \dfrac{TR}{Q} = P \). AR equals the price, so the AR curve is the firm's demand curve.
(iii) Marginal Revenue (MR): the addition to total revenue from selling one extra unit of output. \( MR = \dfrac{\Delta TR}{\Delta Q} \). Under perfect competition \( MR = AR = P \); under imperfect competition \( MR < AR \).
(iv) Average Fixed Cost (AFC): fixed cost per unit of output. \( AFC = \dfrac{TFC}{Q} \), where \( TFC \) is total fixed cost. Because \( TFC \) is constant, AFC falls continuously as output rises (the fixed cost is spread over more units), so the AFC curve slopes downward throughout.
Examination reminder: always attach the correct formula to each concept and note that profit is maximised where \( MR = MC \), not where TR is simply large.
Détails de la réponse
(a) Profit of a firm. Profit is the financial surplus a firm earns when its total revenue from selling output exceeds its total cost of production over a given period. In symbols, \( \text{Profit} = TR - TC \). Economists distinguish accounting profit (revenue minus explicit money costs) from economic (normal and supernormal) profit, where cost also includes the opportunity cost of the entrepreneur's own resources. Profit rewards the entrepreneur for risk-bearing and organisation.
(b) Revenue and cost concepts.
(i) Total Revenue (TR): the total money a firm receives from selling a given quantity of output. \( TR = P \times Q \), where \( P \) is price per unit and \( Q \) is quantity sold. If 100 units sell at \( \text{N}5 \) each, \( TR = 100 \times 5 = \text{N}500 \).
(ii) Average Revenue (AR): revenue earned per unit of output sold. \( AR = \dfrac{TR}{Q} = P \). AR equals the price, so the AR curve is the firm's demand curve.
(iii) Marginal Revenue (MR): the addition to total revenue from selling one extra unit of output. \( MR = \dfrac{\Delta TR}{\Delta Q} \). Under perfect competition \( MR = AR = P \); under imperfect competition \( MR < AR \).
(iv) Average Fixed Cost (AFC): fixed cost per unit of output. \( AFC = \dfrac{TFC}{Q} \), where \( TFC \) is total fixed cost. Because \( TFC \) is constant, AFC falls continuously as output rises (the fixed cost is spread over more units), so the AFC curve slopes downward throughout.
Examination reminder: always attach the correct formula to each concept and note that profit is maximised where \( MR = MC \), not where TR is simply large.
